The benchmark S&P 500 index fell more than 20% from its all-time high in 2022, as investors shunned stocks in the face of soaring inflation and interest rates. The index remained in a technical bear market for over 18 months, until it officially closed at a new all-time high last Friday (Jan. 19).
A new bull market is now officially underway. It could last for quite some time, given inflation has declined significantly recently, and interest rates are expected to fall throughout this year which should boost economic activity and corporate earnings.
With that in mind, Datadog (DDOG 4.95%) and Axcelis Technologies (ACLS 3.06%) will report their full-year financial results for 2023 in February, and it could pave the way for upside in their respective stock prices. Here's why investors might want to buy both of them.
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1. Datadog is growing its presence in artificial intelligence
Cloud computing is everywhere. It powers our emails and allows us to store important files securely online. Businesses use it even more extensively because it powers their websites and sales channels, and it also connects their teams so employees can collaborate no matter where they are located. But the cloud does come with challenges, which is why 26,800 businesses have turned to Datadog's monitoring platform.
Whether a business operates an online retail store or a popular online game, determining user satisfaction can be tricky. What happens if digital infrastructure goes down for a specific group of customers in one geographical location? The business might not know until it experiences a drop in revenue.
Datadog, however, plugs into that cloud infrastructure and monitors it around the clock. It can immediately alert management to technical issues, so they can be rectified before they impact the user experience.
Businesses can now enlist the help of a generative artificial intelligence (AI) bot called Bits AI to speed up diagnostics. Bits AI is embedded within Datadog, and it autonomously creates incident summaries which can save managers hours of manual investigating. Plus, it can hold conversations with the user to help them drill down to the root cause of incidents more quickly.
Datadog has also expanded its monitoring expertise into the realm of AI development. Engineers building large language models (LLMs) -- which are the foundation of any AI application -- can now use Datadog to diagnose performance issues, troubleshoot bugs, and track development costs.
Datadog will report its financial results for the full year 2023 on Feb. 13. It expects to have generated a record-high $2.1 billion in revenue, which is a number it revised higher in the recent third quarter (ended Sept. 30). AI customers accounted for 2.5% of Datadog's annual recurring revenue in Q3 which was up from 2% in Q2, and that number is likely to keep growing.
AI software could generate $14 trillion in revenue per year by 2030, according to Cathie Wood's Ark Investment Management, so Datadog's new LLM monitoring tool could be a fantastic picks-and-shovels story as companies race to develop AI applications. That alone is a great reason to own the stock.
2. Axcelis Technologies is a fantastic growth story at a bargain-basement price
Axcelis Technologies operates in the semiconductor industry. The company is valued at just $4.3 billion so it doesn't receive as much attention as giants like Nvidia and Advanced Micro Devices. Plus, Axcelis doesn't actually produce any chips -- it manufactures ion implantation equipment which is critical to the fabrication process.
Nevertheless, Axcelis stock has soared 570% over the last five years. The company continues to see hot demand for its Purion systems, especially from manufacturers of silicon carbide-based power devices. Those devices deliver and regulate electric power in high-current applications, and silicon carbide is a more efficient chemistry than traditional silicon-based hardware. In electric vehicles, that results in faster charging times and increased mileage.
Axcelis also expects to see increased demand driven by AI in the near future. In the third quarter of 2023 (ended Sept. 30), management said AI workloads require far more memory (DRAM) and storage (NAND) capacity. That could lead to more complex fabrication processes and more expensive chips, and producers will likely turn to Axcelis for more advanced equipment.
Axcelis had an enormous order backlog worth $1.2 billion in Q3, which was near a record high. The company will report its full-year 2023 financials in early February, which will tell investors whether that backlog has grown even larger.
On Jan. 16, Axcelis announced an upward revision to its revenue and earnings guidance for the final quarter of 2023, which will likely boost its overall results. The company now expects to report $300 million in Q4 revenue (up from $295 million) and $2.05 in earnings per share (up from $2.00).
If those numbers come in as expected, Axcelis' total revenue for 2023 will hit a record high of $1.12 billion, representing an increase of 21.7% compared to 2022. Its earnings per share will total $7.33, up an even more impressive 34.2%.
Here's what makes Axcelis so enticing right now. Based on that earnings number, its stock trades at a price-to-earnings (P/E) ratio of just 18.3. For context, the iShares Semiconductor ETF (NASDAQ: SOXX) trades at a P/E ratio of 28.5, which means Axcelis stock will have to soar 55% just to trade in line with its peers in the chip sector.
Therefore, so long as the company's 2023 results come in as expected in February, this stock could be one of the best bargains this year.
